CRAIG FEATHERBY: Time to ditch apartheid-era exchange controls

2021-11-30 09:40:00 PM

Previous regime’s attempt to stem capital flight came at a high economic price, and one we continue to pay today

Craig FeatherbyPeople walk past a board showing the currency exchange rates outside an exchange office in Istanbul, Turkey. File photo: REUTERS/DILARA SENKAYAOn March 21 1960 several thousand people gathered at a police station in the then Transvaal to protest against the apartheid government’s imposition of pass laws. At

mid-morning the atmosphere was described as “peaceful” and “festive”, with fewer than 20 police officers present. However, as the crowd continued to grow police reinforcements rushed in armoured vehicles, armed with rifles and submachine guns. In one of the most chilling examples of apartheid state violence, the police opened fire on the crowd, killing 69 people, including eight women and 10 children.

The Sharpeville massacre triggered a rush of divestment from SA. In the massacre’s wake came the realisation that violence and political instability would intensify as some of apartheid’s most dehumanising policies were implemented. Local and international investors began to move large amounts of money out of the country, fearing sudden economic collapse and currency devaluation.

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Concerned about an upset in the balance of payments, the apartheid state, in characteristically authoritarian fashion, imposed stringent exchange controls in December 1961, in addition to the introduction of the financial rand. These policies in effect put an end to the relatively unrestricted ability to move money in and out of SA. Many of those controls persist until today; restrictions on local residents’ ability to freely move money offshore remain some of the most onerous in world.

Exchange controls appear to have assisted the apartheid regime in maintaining macroeconomic stability despite their economically and morally disastrous policy choices and legislation. However, this short term “gain” came at a long-term economic cost, which we continue to suffer today. It

is high time we scrapped archaic, apartheid-era exchange controls in favour of liberalisation.An ineffective shieldProponents of exchange controls argue that they are necessary to protect a country against the economic threat of capital flight and divestment. In addition, and perhaps even more importantly for developing countries like SA, they protect against the devaluation shocks that can occur when speculators “pump and dump” a currency, especially at times of political turmoil.

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While the dollar, for example, is too plentiful for these kinds of shocks to occur, smaller, developing market currencies can be vulnerable to volatility. Exchange control insulates developing countries — especially those with governments prone to making economically unsound decisions — from financial turbulence by restricting how much of the local currency can be bought and sold.

While exchange controls do maintain stability, they also shield fiscally and economically irresponsible states from accountability for bad decisions. They also come at a high economic cost.Liberalisation of controls on capital movement, especially in the developing world, is associated with a significant increase in the activity of multinationals. This, in turn, increases growth and employment in countries where these companies are present, and encourages investment in infrastructure. SA has already lost out on — and that is set to continue — perhaps billions of rand in growth-driving, job-creating foreign investment due to the persistence of policies that belong to the planned economy of the past.

Where developing economies have gradually relaxed exchange controls, the results have been positive. Chile, especially, experienced relatively stable economic growth after their elimination, and its currency has not be subject to extreme volatility relative to those in other emerging markets. The Chilean example suggests SA could well be ready to follow suit.

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For companies and individuals inside the country, moving large sums of money offshore is fraught with costly red tape because of how the SA Reserve Bank enforces exchange controls. Large SA companies and banks get around this by opening subsidiaries (in Mauritius, for example) through which they conduct their international operations, or they simply move their headquarters offshore. This comes at a severe cost in terms of tax revenue and jobs in SA.

Two further arguments for the abolition of exchange controls stand out. First, they are not very effective insofar as stemming the kind of capital flight. Today, there are new ways to externalise funds — cryptocurrency especially — that did not exist when exchange controls were conceptualised. While regulators could devote time and resources to trying to stop these methods, it seems more prudent to abolish exchange controls, especially when doing so will have positive economic spin-offs.

Second — and this is a point that will become increasingly important as the “brain drain” intensifies — well-qualified and wealthy South Africans who wish to stay in the country regard having assets offshore to be a crucial “insurance policy”. Holding the majority of one’s wealth in a geographically diversified portfolio — where it can grow in equity markets more vibrant than ours and in economies less vulnerable to political instability — allows these people to live and work in SA without feeling as if they are putting the futures of their families at risk. Unlimited offshore investment opportunities therefore deter emigration and keep desperately needed skills in the country.

An economic imperativeNot only is stemming the tide of skills loss from SA an imperative for maintaining and growing the local economy, it also ensures that people with significant earning potential continue to spend money onshore, thereby supporting the economy. Moreover, there is always the likelihood that their wealth will be repatriated should the country’s risk profile improve. It is important that we safeguard the potential for economic growth in SA. 

What started out as an emergency measure to keep the apartheid state from falling apart economically has become a permanent feature of our economic reality, which the ANC has opted not to dismantle. It is high time to let go of exchange controls in the broader interests of the economy. The government ought to control risk through prudent decision-making and legislation rather than through archaic restrictions on the movement of capital.

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